Tower Private Advisors
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Capital Markets Recap
- Kodak has hired a law firm to assist with restructuring. Bankruptcy seems imminent. Late today the company said they would make the next coupon payment on its bonds.
- Berkshire Hathaway bought back its first shares of its own stock. Estimates are that Warren Buffett considers his company’s stock to be about 30% undervalued. In the same story, he said, “it’s very, very unlikely we’ll go back into recession.” What do you think? Take the survey, below.
- WB also said his tax proposal would only tap the top 50,000 earners, helping to reduce the number of soldiers on the one side of the class war. He also said it was folly to say he should voluntarily contribute additional taxes, something that was suggested when he said he didn’t think he paid enough in taxes.
- Finally–and, I think, enough for WB–he said foreign banks shouldn’t look to Berkshire Hathaway to bail them out.
- This morning on Bloomberg radio, one of the most successful forecasters said the U.S. is,”tipping into a new recession,” and that, “it’s not reversible.” That was Lakshman Achuthan of ECRI. If that’s the case, one of the worst performing sectors should be the Industrials group (e.g. GE, John Deere, etc.) If a canary in the coal mine is Ingersoll Rand, we could be in trouble. That stock fell by 18% today when it lowered its earnings forecast based on lower sales of residential residential heating and cooling systems and commercial security products.
- Japan has the world’s third-largest pension fund and it announced it would begin investing in emerging market stocks. I find it utterly amazing that a country at what I consider to be the doorstep to emerging Asia is just now going to look at investing in emerging markets!? What?
- One of the ways that the Federal Reserve affects markets is said to be by jawboning. In other words, Chairman Bernanke sets the markets straight so that their expectations get more in line with Ben’s. Increasingly, it seems that the Federal Reserve’s policy decisions have become increasingly contentious, and instead of jawboning markets, Fed governors are doing like Samson and taking a jawbone to each other. A post on the blog Clusterstock referred to the Fed as “the most divided since 1992,” and a Bloomberg story on Tuesday recapped a speech by Atlanta Fed Governor Lockhart saying that Operation Twist will have a modest impact. Then, on Wednesday, Kansas Fed Governor Hoenig said that the policy risks creating new “complexities.”
- Ford is, apparently, contemplating adding about 10,000 new jobs. Hurrah!
- Apple will introduce its iPhone 5 on October 4. Recently, one of its engineers recently ” ” “accidentally” ” ” left a prototype in a bar…just like the last time the iPhone4 was to be released.
- Amazon announced the release of its Kindle Fire, which will compete against the iPad…40% of the cost sans 3G and cameras. Runs on the Android operating system. Just in time for Christmas. Jeff Bezos, Amazon CEO, even used some of the very lines Steve Jobs used when he showed the world the iPad. There is debate whether the Kindle Fire will be an iPad killer, but at $199 it doesn’t cost much to find out.
- Standard & Poor’s, which, along with Moody’s and others, was accused of being either clueless or complicit in the housing bubble run-up, was the first of the major ratings agencies to downgrade the U.S., and it proceeded to downgrade–last week–several formerly too-big-to-fail banks saying they might be too big to save. Well, just like the kid who can’t stay out of trouble, it seems that S & P let news of the U.S. downgrade out before it was released to the general public. Are you surprised?
Featured above is a screenshot of the website for the incredibly-timely movie Contagion. I think this might be the opposite of the magazine coverstory phenomenon, which holds that by the time an issue captures the attention of a magazine editor, it’s well past fully discounted in the psyche. In this case, it appears to be a dark foreboding of what’s going to happen in Europe–and what the authorities are beginning to–it seems–develop some since of urgency over. Following, then, is a brief synopsis of what’s going on there. The entire paragraph that follow should be bold, italicized, and underline.
Greece is on life support, and the plug needs to be pulled. It needs to default. What is currently being talked about is just that–now, naturally, Greece will be able to pay back some of its debts, just not all of them–that Greece will default and the recovery rate–and the haircut–will be about 50%. France has the most exposure to Greek debt. Germany has the best fiscal position to do anything. The northern countries resent having to bail out the lazy, southern, Mediterranean countries, but if the problems spread beyond Greece–i.e. there will be contagion if nothing is done–the northern countries are going to feel a whole lot more than resentment. Remember that Iceland went bankrupt from the bursting of the U.S. housing bubble. In fact, credit default swaps on Morgan Stanley are approaching the level of those on Italy. ‘Turns out that Morgan Stanley’s exposure to French banks, alone, is larger than the market capitalization of the entire firm. So Europe must contain the problem, and the phrase bandied about is that it must “ring fence” the problem. This week, German took concrete steps in that direction, when its parliament voted to increase the size of the European Financial Stability Facility (conjunction, junction, what’s your function?) The move puts Germany on the hook to guarantee loans totalling €211 billion ($283 billion), up from €123 billion.
It’s a big step in the right direction.
Now, how about clicking a button, below. How likely do you think a recession in the U.S. is?
There is little denying that economic weakness is persisting, although it continues to be stronger than economists estimate. In other words, the economic indicators, as a whole, point toward economic weakness in the U.S., but the deterioration isn’t proceeding as fast as economists estimate. This week offered up a good helping of such a conundrum.
On the one hand was the Chicago Federal Reserve National Activity Index, which came in at -0.43 versus economist expectations of -0.37. The survey is comprised of “85 monthly indicators of national economic activity.” The research it’s based on indicates that -0.70 has been seen before all U.S. recessions and such a reading has only given a false signal on one occasion. I estimate the current reading projects a 63% likelihood of recession by this one measure. There were four regional economic indicators this week split evenly between stronger-than-previously and weaker-than-previously. In the former camp were reports from the Dallas Federal Reserve and the Milwaukee Purchasing Managers index. In the latter were reports from the Kansas Fed and the Richmond Fed.
On the other hand were a handful of positive–some surprisingly so–indicators. The version of Durable Goods Orders most closely associated with Capital Spending (i.e. durable goods less transportation and defense orders) jumped by 1.1% after a -1.5% decline in July. The third iteration of Q2 GDP came out at +1.3% (annual rate) versus the previous release of 1.0%. Initial Jobless Claims fell by 30,000 to drop below the 400,000 level. That was the first time since April that the index has been that low. The Department of Labor cautioned, though, that the results were skewed by seasonal adjustments. Finally, University of Michigan Consumer Confidence moved up from 57.8 to 59.4. Hey, I feel more confident. Any time I’m filling up the tank with gas prices down I feel confident about my finances, and I suspect most of the folks surveyed by the U of M do, too.
There were four housing indicators out this week, and all but one was unremarkable. Not surprisingly, given ultra-low interest rates, Mortgage Applications were up sharply. With home sales in the doldrums it’s not surprising that most of the activity was in refinancing. Over the last two weeks, refinance applications have jumped by 33.8%. (Since the beginning of the year, refinances are up by a startling 108%.) Even purchase applications were up, however. They’ve risen by 10.7% over the last two weeks. Viewed over a long time frame, the 10% jump looks like the squiggle of a writer hopped up on caffeine, which is to say it barely registers.
We’re getting to the point where only a few indicators are going to matter–namely employment–as I suspect to many recession is a foregone conclusion, and I sum up next week’s below. Similarly, Bloomberg is beginning to report on more nuanced indicators–or components that make up an indicator. I identify those below, too.
Key indicators to watch
- ISM Manufacturing (Monday) – September
- ADP Employment Change (Wednesday) – September
- ISM Non-Manufacturing (Wednesday) – September
- Initial Jobless Claims (Thursday) – weekly
- Change in Nonfarm Payrolls (Friday) – September
- Change in Private Payrolls (Friday) – September – new
- Change in Manufacturing Payrolls (Friday) – September
- Unemployment Rate (Friday) – September
- Average Hourly Earnings (Friday) – September
- Average Hours Worked (Friday) – September
- Change in Household Employment Survey (Friday) – September – new
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors